What is a Rolling Reserve & How Do They Work?

While researching chargebacks for projects I’m working on, I came across rolling reserves. This discovery led me down a rabbit hole, and I want to share my findings.

I’ll explain what rolling reserves are, how they operate, and how they compare to other reserves.

Let’s begin with what these are.

Key Takeaways

• Rolling reserves typically hold 5 – 15% of gross sales.
• Merchants cannot access these funds during the hold period.
• Reserves may stay in the account for up to 12 months.
• Other reserve types include up-front and fixed reserves.
• Payment processors use rolling reserves to cover costs like chargeback fees.

One way to potentially avoid rolling reserves is to keep chargeback rates low. Chargeback alerts are an effective method. We offer integrations with many popular payment processors to support this.

Learn whether they’re right for you.

What Is a Rolling Reserve?

A rolling reserve is when payment processors hold a percentage of a merchant's transactions. This reserve protects against chargebacks and other liabilities. Typically ranging from 5% to 15% of gross sales. Gateways hold these funds in a non-interest-bearing account. They're released after a set period.

This period usually lasts 6 – 12 months, on a rolling basis.

As new transactions are processed, the oldest funds in reserve are released back to the merchant. This creates a continuous cycle of funds being held and released.

This reserve acts as a financial safety net. As processors must refund cardholders immediately if disputes happen.

Reserves also allow processors to work with higher-risk or new businesses they might otherwise reject.

How does this work?

Summary: Payment processor holds funds to cover certain expenses.

How Does a Rolling Reserve Work?

A rolling reserve withholds a percentage of each transaction for a designated period. Then releases the funds to the business once the period ends:

1. Withhold: The payment processor retains a set percentage of each transaction.

The specific percentage and hold period depend on:

• Business type and industry
• Transaction volume and history
• Risk assessment level
• Whether transactions are domestic or cross-border
• The types of payments being processed

Most holding periods range from 30 to 180 days, with 120 days being common. As it aligns with the average chargeback window provided by credit card issuers.

Though, these windows can extend up to much longer. Let’s use Discover’s Good Faith Investigation reason code as an example. It allows investigations into fraud up to 2 years after the purchase.

2. Hold: Processors store the funds in an interest-free account.

Although merchants can view these funds in their processing statements, they can’t use them until the holding period ends.

Note: These reserve funds aren’t used for active chargeback costs. Gateways debit these costs directly from the merchant's account. The reserve is only tapped if the merchant account closes or the business fails.

3. Release: After the holding period, the gateway returns the funds to the business in a lump sum or installments.

This release schedule is predetermined and may occur daily or monthly, maintaining a steady cycle of reserve funds.

In some circumstances, the processor may adjust or remove the reserve terms. For instance, if the business maintains a strong processing history with few chargebacks.

Here's an example of a rolling reserve in action:

A business processes $100,000 in monthly transactions.

The processor sets a 10% rolling reserve held for 90 days.

For the first month, they reserve $10,000 and release $90,000.

In the second month, another 10% is reserved from that month’s transactions.

After 90 days, the processor returns the first $10,000 to the business.

What’s the purpose of all this, anyway?

Purpose of A Rolling Reserve

A rolling reserve protects payment processors by holding a portion of merchant transactions. It safeguards against risks associated with high-risk or new businesses. Such as chargebacks, refunds, and fraud.

Payment gateways use rolling reserves to cover:

• High-risk or new businesses without a track record.
• Chargebacks, protecting against dispute costs.
• Refunds, ensuring sufficient funds are available.
• Fraud, shielding processors from potential losses.

Let’s break a couple of these points down.

Chargebacks require merchants and processors to pay fees. Without funds, a high-risk business might struggle to cover these costs. Leading to potential processor losses.

Rolling reserves ensure businesses set aside enough to cover these situations.

Wait, what is a chargeback?

In short, it’s when a customer claims an order isn’t legit with their bank or card issuer. From there, the issuer forces the merchant to reverse the transaction.

It’s not the same as a refund.

We provide more information on chargebacks in a separate piece. It’s essential to know about them as a business owner.

It’s also important to know about them for this upcoming section.

Summary: Covers potential losses from future transactions.

When Does a Business Need a Rolling Reserve?

Common scenarios include::

• High-risk industries: Sectors with higher chargeback rates, e.g., gambling and travel.
• New businesses: New businesses may need this until they build a transaction history.
• Seasonal businesses: Reserves adjust with transaction volumes.
• Poor credit history: Businesses with poor credit ratings or financial instability.
• High transaction volumes: Large transaction volumes often requires reserves.
• High chargeback rates: Above-average chargebacks in their industry may also require a reserve.

Most businesses don’t need rolling reserves. But payment processors like Stripe may mandate one if they think your business is risky. Often falling into one of the categories above.

In some cases, you might have a choice regarding a rolling reserve. In others, it’s mandatory. Depending on your business type. You may also need to consider other reserve types, which we’ll cover later.

But first, let’s look at how these reserves affect sellers.

Impact of a Rolling Reserve on Merchants

A rolling reserve impacts merchants in several ways:

• Cash flow: Restricts cash flow by holding a percentage of sales.
• Working capital: Reduces available funds for daily operations.
• Growth: Limits growth potential by restricting access to revenue.
• Profitability: Prevents merchants from earning interest on withheld funds.
• Account acquisition: Enables high-risk merchants to open accounts.
• Risk management: Helps secure accounts for high-risk businesses.
• Liability coverage: Ensures coverage for customer refunds and chargebacks.

As you can see, rolling reserves have benefits and drawbacks.

For businesses, withheld revenue can complicate cash flow and financial planning. This safeguard ensures high-risk merchants can cover potential chargebacks and refunds. Though, it also means they lose access to a portion of their funds.

This loss adds to other costs like taxes, payment processing fees, and operating expenses.

Reducing overall profit.

These reserves, however, do allow certain high-risk merchants access to new accounts. Supplement sellers, for example, can now work with payment processors who might otherwise decline them.

Rolling reserves aren’t the only type of reserve. Let’s explore other types you may encounter.

Types of Reserves

Here are the main types of reserves you may encounter:

• Rolling Reserve: Holds a portion of revenue temporarily to cover potential losses.
• Fixed Reserve: Holds a set amount until you meet conditions.
• Up-Front Reserve: Requires funds before processing begins.

The following sections compare these reserves in terms of withholding, release, calculation, purpose, flexibility, funding, and risk assessment.

Let’s continue.

Rolling Reserve vs. Fixed Reserve vs. Up-Front Reserve

1. Withholding Method:

• Rolling: Processor withholds a percentage (usually 5–15%) of each transaction.
  • Creating a dynamic reserve.
• Fixed: Processor holds a fixed amount, funded upfront or accrued to a set cap.
• Up-front: Full reserve amount is paid before processing starts.

2. Release Structure:

• Rolling: Gateways gradually release funds on a rolling schedule (e.g., after 180 days).
• Fixed: Processors release reserves after sellers meet specific conditions.
• Up-front: Funds are returned after a set period or at account closure.

3. Reserve Calculation:

• Rolling: Amount varies with monthly sales — higher sales lead to more funds withheld.
• Fixed: Remains constant once the seller meets its target, regardless of future sales.
• Up-front: Calculated based on projected monthly volume and risk.

4. Purpose:

• Rolling: Supports ongoing risk management.
• Fixed: Acts as a security deposit, often used for new or limited-history merchants.
• Up-front: Immediate risk protection for high-risk businesses.

5. Account Flexibility:

• Rolling: Allows access to older funds while maintaining protection through newer transactions.
• Fixed: More restrictive, holding all funds until conditions are met.
• Up-front: Initially restrictive, but allows full processing capacity immediately.

6. Funding Options:

• Rolling: Funded through transaction withholdings.
• Fixed and up-front: Funded via upfront payment, credit letters, or withholding until the cap is reached.

7. Risk Assessment:

• Rolling: Adjusts based on business performance and transaction trends.
• Fixed: Based on initial risk and monthly volume estimates.
• Up-front: Assessed before processing, based on industry risk and other factors.

Each type differs in how funds are withheld and released by the processor.

Rolling reserves provide a dynamic system of holding and releasing funds. Fixed reserves are more straightforward but less adaptable.

What even is a “fixed” reserve?

What is a Fixed Reserve?

A fixed reserve requires a predetermined amount held in reserve. Regardless of processing volume. This amount typically represents a percentage of expected monthly processing volume. This reserve is also known as a capped, minimum, or static reserve.

PayPal will call this a “minimum reserve.”

For instance, if a business processes $25,000 monthly and has a 50% fixed reserve, the processor holds $12,500.

Once the cap is reached, the processor doesn’t hold further funds. These funds remain until account closure or reserve removal.

And what is an up-front reserve?

Summary: Holds a specific amount until conditions are met.

What is an Up-Front Reserve?

An upfront reserve is money a business must deposit before accepting transactions. The amount, calculated from expected sales and risk level, protects against potential chargebacks.

If you’re using PayPal, they call it a “jumpstart reserve.”

When would this type of reserve happen?

Let's say a new online electronics retailer is applying for payment processing.

Due to being a new business in a high-risk industry, the processor requires a $25,000 up-front reserve before activating the account.

The merchant wires $25,000 to the processor. The gateway holds this for the duration of their merchant agreement.

The $25,000 reserve remains untouched and separate from daily processing funds. Serving as protection against potential chargebacks or customer disputes. After 12 months of successful processing and meeting the terms of their agreement, the processor returns $25,000.

Is there a set amount of time all these reserves are held for?

Summary: Funds are held immediately when making an account.

How Long Are Rolling Reserves Held For?

Rolling reserves are typically held for 30 to 180 days. Most processors hold funds for 90 – 120 days. Payout schedules can be daily or weekly. The exact duration depends on your business risk level.

The duration of a rolling reserve depends on factors such as:

• Industry risk: Higher-risk industries may require longer hold times.
• Business history: Newer businesses may face longer reserve periods.
• Chargeback timeframes: Reserve periods often align with standard chargeback timeframes.
• Processor policies: Terms vary by the payment processor.

And what are these rates?

Summary: They’re usually held for 30 – 180 days.

What Is the Rolling Reserve Rate?

The rolling rate is typically 5 – 15% of your monthly gross credit card volume. The actual amount will vary by payment processor. If you’re a high-risk seller, this could be up to 100% of your monthly card processing amount. This amount is for extreme cases.

The reserve rate is influenced by factors mentioned earlier in this guide. Including risk level and transaction volume.

These reserve fees add to other charges like:

• Subscription fees (e.g., Shopify)
• Processing fees
• Chargeback protection fees
• POS service fees
• Taxes

That’s rough. What do you do if you’re in this situation?

Summary: 5 – 15% of your gross card volume. Can go up to 100%.

What to Do If Your Funds Are in a Reserve

When your funds are placed in a rolling reserve, they are temporarily inaccessible. There's no way to negotiate your way out of it.

While you can't eliminate the reserve requirement, there are several strategic steps you can take to improve your situation.

1. Demonstrate Lower Risk:

Present evidence to your bank that your business risk is lower than initially predicted.

This can include documentation showing low chargeback rates, stable transaction volumes, and strong customer satisfaction metrics. Many payment processors may consider adjusting or reducing reserve percentages when they see solid, data-backed evidence.

2. Monitor Key Metrics:

Track important performance indicators, including:

• Chargeback ratios
• Transaction success rates
• Customer dispute resolution rates.

Keeping this data accessible helps identify areas for potential improvements. You can also use it to prove that you’re not high-risk.

3. Maintain Detailed Reserve Records:

Organize records of your reserve account, noting deposit dates, hold periods, and expected release dates. 

This detailed documentation helps to ensure timely release of funds. It also provides leverage when discussing terms or adjustments.

4. Build Processing History:

Focus on establishing a consistent, reliable processing history with minimal issues.

Banks are more inclined to relax reserve requirements for sellers who show steady, stable transaction patterns over several months.

5. Optimize Cash Management:

Develop a cash flow strategy that accounts for the reserve hold.

This might include:

• Adjusting payment terms with suppliers
• Timing large expenses around reserve releases
• Maintaining a separate operating fund to cover immediate needs

Hope this information helps.

Wrapping Up

High chargeback rates often result in rolling reserves, impacting cash flow. Focusing on chargeback prevention can help avoid reserves.

Chargeback alerts are an effective strategy, and we offer access to these alerts.

Try us out.